More so today than in any other time in history, businesses have a number of options to choose from when seeking and securing money to expand, cover cash flow gaps, seize a new opportunity or just keep their business going during slow periods. One of those popular alternative financing methods is asset based financing also called commercial finance by those in traditional banking.

Once viewed as a Hail Mary effort to save a declining business, the Wall Street Journal reports that asset based loan financing has become more widely used since the 2008 financial bust. When standard banks began to lend less and more companies needed to borrow cash as a result of slow-paying customers, businesses turned to alternative lending options. In addition, an asset based finance loan can be processed quickly so companies that don’t want to wait around for a term bank loan are turning to them.

Asset Based Finance: An Alternative Way to Get Cash Fast

Generally speaking, an asset based lending loan is more costly than standard loans but less costly than other alternative financing options such as invoice factoring. This is because the company is putting up its liquid assets, which may include inventory, existing receivables, equipment, and the like. As such the company’s assets serve as collateral for the loan making the process less expensive than factoring receivables, which is not a loan and does not require collateral. With accounts receivable factoring, the factoring company buys the invoices outright paying the seller within 48 hours and collecting the receivables themselves directly from the seller’s customer.

Asset Based Lending Vs. Factoring Accounts Receivables

The downside of asset based lending is that like term business loans, the company’s assets can be legally seized should it default on the loan. With invoice factoring, if the customer fails to pay its bill, the factoring company will go after them rather than the original seller. Asset based financing is sometimes referred to as “betting your future assets for the benefit of your current ones” so if a company feels confident about its projections, then it can feel confident about this type of loan.

Both options will provide businesses with needed cash quickly, yet each one comes with its own set of processes and procedures. So those businesses looking at asset based lending options should do some research before settling down and agreeing to a provider. Many invoice factoring companies offer both factoring services and asset based loans, or businesses can find one from a traditional bank.